The Myth of the Real Estate Pioneer
Speculating in unknown or unsafe neighborhoods is a risky game
Everyone's heard a story about a friend of a friend who bought a house in a neighborhood just before the neighborhood took off. The person paid a small amount for a home -- say
Call these people real estate pioneers: They venture into unknown or unsafe areas after getting a tip that the market in that area is about to get hot. They're ahead of the curve, beat the rush to move to the new, hip part of town, and save tens of thousands of dollars in the process.
There's only one problem with the legend of the real estate pioneer: It's entirely untrue. According to experts, timing when to purchase a home in a questionable neighborhood is a dark art. When first-time homeowners get into this kind of speculative game, they are flirting with financial ruin.
"If you're going to be doing this kind of investment, you ought to be doing it with speculative funds," says
Infinite downside.Staiger uses a comparison with investments in stocks and bonds to illustrate just how costly a bad real-estate bet can be. If an investor puts
Homeowners are responsible for mortgage payments, housing upkeep, and property taxes, among other expenses like utilities. So if the house can't be sold, the potential downside for a
The unpredictability of the employment market also adds to uncertainty about the future of a neighborhood, Staiger says. Often, areas become hot because of the availability of work nearby. But it's never certain that these jobs will stay in the area forever. And if the jobs leave, the real estate market will suffer.
In the past, "there wasn't a whole lot of movement in labor. Now labor is mobile. You're constantly moving. The only thing certain about real estate is the bill," Staiger says.
Data from the
Inside info needed. According to
"There are micro-hotspots that require local knowledge. Zoning for new projects, public investment for highway projects -- these are both things that have a positive affect on value," Simon says.
Simon adds that the large number of foreclosed homes on the market make it even more difficult to predict future housing prices. Until the market is flushed of these homes, unpredictability will reign.
"There's insidious linking between the markets," Simon says, referring to the foreclosed housing market and the traditional housing market. "All prices are going to get dragged down."
A game for the rich. Both Staiger and Simon say real-estate speculation should be left to the rich. "Your primary housing vehicle should not be considered an investment -- it should be a consumptive asset," Staiger says. "You shouldn't be betting with your family's security, which is what a house really should be. It should be a savings vehicle that costs you less every year."
Staiger says the current availability of cheap mortgages --
"It shouldn't be easy," to get a mortgage, Staiger says. "A home is a gift that keeps on taking, a depreciating asset."
"We're already recreating the sins of the past," he adds, referring to the speculation of the last decade that led to the real estate bubble. "The American psyche of ownership still has not changed."
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Real Estate - The Myth of the Real Estate Pioneer
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